Market Views: Is it a 'golden' time to hedge against inflation?
On the back of recent gold price fluctuations, analysts’ views are mixed on whether the metal is an attractive “buy” as a crisis hedge during the uneven economic recovery.
Gold prices have fallen as much as 14% since hitting a record of $2,000 a troy ounce last August. Prices have hovered between $1,900 and $1,700 this year, even as the US Federal Reserve revealed a dovish stance towards monetary policy at the Jackson Hole symposium last week.
Meanwhile, many gold companies are trading at record low valuations relative to their historic multiples. The New York Stock Exchange Gold Bugs index has tumbled over 20% since the start of this year, reaching its lowest level since April 2020.
Gold analysts and fund managers AsianInvestor talked to have divergent views on gold investment, resulting from their different outlooks on real yields of government bonds, real interest rate, the duration of inflation, and the pace of economic recovery.
Some remain bearish as they view inflation as temporary, and view energy, industrial metals, or real estate as better hedge assets than gold even if inflation continues to rise. Those who disagree think gold is trading at an attractive value, and can protect investors from inflation risks.
AsianInvestor asked them if gold is currently a good “buy” as prices drop and the outlook for the metal in the near future.
The following contributions have been edited for clarity and brevity.
Tai Hui, Asia chief market strategist
J.P. Morgan Asset Management
We remain bearish on the outlook of gold over the next 1-2 years. The key rationale is that real bond yields, especially United States government bonds, are expected to rise, driven by the ongoing economic recovery and gradual normalisation of monetary policy by the Federal Reserve.
Currently, real bond yields are in negative territory, which is not consistent with the pace of economic growth in the US and the prospects for more fiscal stimulus. The rising yield environment could put gold, which generates no income, on the back foot. We also believe inflation is a largely temporary phenomenon, which also undermines the case for gold as an inflation hedge.
Besides, we believe that there are better alternatives for investors if they want to seek protection from rising prices, such as energy or industrial metals, or real estate. Investors should also note that gold’s volatility is high and does not consistently offset risk assets’ correction.
Chang Hwan Sung, director of solutions research
Invesco
We continue to take a ‘risk on’ approach, expecting equities to outperform fixed income as economies continue to accelerate for the next several quarters. In this scenario we expect more cyclical commodities to outperform gold. Our long-term annual return expectations which are based on this base scenario for precious metals including gold is 2.3%, compared to 7.2% for energy and 4.5% for industrial metals.
Outside our base case, there are two primary scenarios where gold would perform well. The first would be a slowdown in the global economy due to the resurgence of the pandemic, in which case we would take a ‘risk off’ approach, expecting outperformance from sovereign debt, investment-grade debt, and cash. We also expect gold to outperform in this case, as investors seek to hide in safe assets.
Another possible scenario with upside for gold is if inflation remains high and proves to be more sustained than we expected. In this environment, we would expect commodities, real estate, Treasury inflation-protected bonds, and equities, especially financials, to perform well. We believe gold will also do well in this case as a real asset that preserves value in times of high inflation.
Nicholas Johnson, portfolio manager, commodities
PIMCO
Our framework for viewing gold is based on our assessment that, while many factors influence the price of gold, only one explains the majority of moves over the past decade: changes in the real (i.e., inflation-adjusted) yield of government bonds.
Given this, we believe gold is attractively valued – one might even say cheap – in the context of historically low real interest rates. In fact, our real yield-adjusted gold price is near the lowest level we have seen in 15 years, despite nominal prices remaining only 15% or so below 2020 highs. As such, we see considerable value in gold, with recognising that the key risk is a real rate rise.
Robin Tsui, APAC gold strategist, global SPDR business
State Street Global Advisors
We expect gold to range between $1,750/oz and $1,900/oz in the near term, as prices continue to be impacted by news on tapering, delta variant outbreaks, and mixed US economic data.
We believe a long-term support level has been established near US$1,700/oz and we expect gold prices, over the medium term, to be supported by the continued negative real rate environment and weakness in the US dollar. The $1,800/oz level is also a near-term key support level for investors to watch out for as gold appears to be consolidating near this level.
While we expect the Fed to start raising interest rates in 2023, the US 10-year treasury real yield, one of the key drivers of gold prices, should remain in negative territory for some time. We also think the US dollar may continue to weaken over the medium term driven by rising US budget deficits.
For those investors that are worried about inflationary risks, gold historically has been an effective hedge against a rising inflationary environment. Investors should position themselves with the potential risks and uncertainty ahead with a 2% to 10% strategic allocation to gold in a diversified portfolio, as gold can improve the overall risk-adjusted return of a portfolio, over the long term.
Chaohui Guo, commodity analyst
China International Capital Corporation (CICC)
We believe the recent gold price fluctuations were mainly a result of increased short-term speculative sentiment. In the medium-to-long term, risk preference indicated in gold ETF position changes should be a key factor for fundamentals.
The market now generally believes that recent the Covid-19 resurgence and economic slowdown may impact the likelihood of an interest rate hike in 2022, but the real interest rate remains likely to rise. Moreover, the infrastructure plan and debt ceiling issue might also indirectly affect gold price via real interest rate.
In the near term, the interest rate is a key factor affecting gold price, and fluctuations may increase. In the medium term, the market risk appetite might alter gold ETF positions, and it is a major downward risk on gold price. Looking ahead, we think gold can still serve as a hedge against risks. However, under our base-case scenario, we maintain our gold price forecast for end-2021 at US$1,600/ounce.
Steve Land, portfolio manager, Franklin Gold and Precious Metals Fund
Franklin Templeton
Gold has retreated from its highs as optimism around the global economy has emerged, but risks remain, and gold may still serve a role when periods of uncertainty re-enter the market as there are bound to be many bumps along the path to recovery.
As a result, we believe that having a diversified portfolio with some exposure to non-correlated assets such as gold or gold equities, like those held by the Franklin Gold and Precious Metals Fund, makes sense in the current environment.
Luc Luyet, currencies strategist
Pictet Wealth Management
In the next few months, some moderate rise in long-term real rates and scope for reduced support from official demand (which has been strong in the first semester) may weigh on the gold price.
However, we see limited scope for a rise in long-term real rates as the US economic growth momentum should fade and inflation may remain elevated in the next quarters. Furthermore, we expect the Fed to be very gradual in the normalisation of its monetary policy, potentially quelling some concerns among investors while reducing tailwinds to the US dollar.
Such an environment of low long-term real rates in the next quarters should keep gold attractive for investors as a store of value bearing no credit risk.